Equity Risk Premium financial definition of Equity Risk Premium. Equity Risk Premium finance term by the Free Online Dictionary.

Equity Risk Premium

The return that an investor expects over and above the risk-free rate of return in exchange for investing in common stock instead of U.S. Treasury bonds. The equity risk premium may be calculated as the return such a stock actually earns over a given period. For example, if the interest rate on a Treasury bond is 4% and the stock returns 9%, the equity risk premium is 5%. Whether or not this is worth the investment depends on the cost of the stock, the risk relative to other stocks with similar returns, and the investor's own risk aversion. The equity risk premium is also called simply the equity premium.

equity risk premium

The extra return expected from investments in common stocks compared to the return from U.S. Treasury securities.

Equity Risk Premium

What Does Equity Risk Premium Mean?

The return provided by an individual stock or the overall stock market in excess of the risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the risk premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium. Also referred to as the equity premium.

Investopedia explains Equity Risk Premium

The risk premium is the result of the risk-return trade-off, in which investors require a higher rate of return on riskier investments. The risk-free rate in the market often is quoted as the rate on longerterm U.S. government bonds, which are considered risk-free because of the unlikelihood that the government will default on its loans. Compare that with securities that offer no or little guarantees. Remember, companies regularly experience downturns and go out of business. If the return on a stock is 15% and the risk-free rate over the same period is 7%, the equity-risk premium is 8% for this stock over that period.

Related Terms:
• Equity
• Gordon Growth Model
• Premium
• Risk
• Risk-Return Trade-Off

Mentioned in	?		References in periodicals archive	?		Financial browser	?		Full browser	?
Real Rate of Return Treasury Bill	That reality," El-Erian says, "is not captured in the equity risk premium model and what people assumed was normal. SEARCHING FOR TRUE NORTH by Roben Farzad, with Tara Kalwarski / BusinessWeek The question of equity risk premium appropriate for Central Europe is a topic that every serious investor in the region, along with potential sellers of assets, must be pondering. Risk premium: investors should not compare the pricing of distressed ... by Nemethy, Les / The Sofia Echo (Sofia, Bulgaria) Pump: Over the past few years, valuation professionals have made a lot of adjustments to the equity risk premium because volatility was very low for a number of years. Valuations for financial reporting in today's market: experts ... by Journal of Accountancy	Equity collar equity commitment note Equity Contribution Agreement equity dividend equity financing Equity floor Equity Fund Equity Funding Equity Income Equity injection Equity Kicker Equity Linked Foreign Exchange Option equity loan Equity Market Equity Market Capitalization Equity Market Neutral equity method Equity Multiplier Equity Note equity of redemption Equity Option Equity Options equity participation Equity Participation Loan equity REIT Equity Risk Premium Equity Security equity sharing loan equity stripping Equity Swap Equity Unit Investment Trust Equity Warrant Equity Withdrawal equity yield rate Equity-Indexed Annuity Equity-Linked Eurobond Equity-Linked Eurobonds Equity-Linked Policies Equity-Linked Policy Equityholders Equivalencia Equivalencia de rendimiento Equivalent Annual Annuity Equivalent annual benefit Equivalent Annual Cash Flow Equivalent Annual Cost Equivalent Bond Yield Equivalent loan Equivalent Taxable Yield Equivalente di azioni ordinarie Equivalentes de acciones ordinarias	equity note Equity Notes equity of redemption equity of redemption equity of redemption Equity Office Media Network Equity Office Properties Trust equity option Equity options equity participation Equity Participation Investment Program equity participation loan Equity Participation Loans Equity Participation Note Equity premium Equity premium puzzle Equity Premiums Equity Principal Audition Equity Providing Preferred Income Convertible Securities Equity Quantitative Trading Group Equity Real Estate Investment Trust Equity Real Estate Investment Trusts Equity REIT Equity REITs Equity Release Solicitors Alliance Equity Risk Management System Equity Risk Premium Equity Risk Premiums Equity securities Equity securities Equity securities Equity securities Equity securities Equity security Equity security Equity security Equity security Equity security Equity Share Capital Equity Share Capital Equity Share Capital Equity Share Capital equity sharing loan Equity skimming Equity Stock Equity Stock Equity Stock Equity Stock Equity Stock Equity stripping Equity Subordinated Debentures Equity suffers not a right without a remedy Equity swap Equity swaps Equity Take Out Equity Transfer Trust Equity Turnover

Mentioned in

References in periodicals archive

Financial browser

Full browser

Real Rate of Return
Treasury Bill

That reality," El-Erian says, "is not captured in the equity risk premium model and what people assumed was normal.

SEARCHING FOR TRUE NORTH by Roben Farzad, with Tara Kalwarski / BusinessWeek

The question of equity risk premium appropriate for Central Europe is a topic that every serious investor in the region, along with potential sellers of assets, must be pondering.

Risk premium: investors should not compare the pricing of distressed ... by Nemethy, Les / The Sofia Echo (Sofia, Bulgaria)

Pump: Over the past few years, valuation professionals have made a lot of adjustments to the equity risk premium because volatility was very low for a number of years.

Valuations for financial reporting in today's market: experts ... by Journal of Accountancy

Equity collar

equity commitment note

Equity Contribution Agreement